Estimates of the Inflation versus Unemployment Tradeoff that are not Model Dependent

Research output: Contribution to journalArticle

Abstract

For governments who want to improve their economies via fiscal, monetary, trade or exchange rate policies, the tradeoff between the inflation rate and the unemployment rate is extremely important. This tradeoff has become known as the Phillips curve. Among economists there is no consensus on how to model and estimate the Phillips curve. Ideally, all the factors that could affect the Aggregate Supply and Aggregate Demand curves should be included in the model including exchange rates, transportation costs, infrastructure, weather, income distribution, etc. No researcher has created a model that could not be criticized for omitting some important variables. This paper use Bi-Directional Reiterative Truncated Least Squares, a statistical technique that solves the omitted variables problem, to estimate the tradeoff between inflation and unemployment for 34 countries between 2002 and 2017. I find that this tradeoff varies noticeably from country to country in a given year, but that many of these tradeoffs move in the same direction over time. This common direction of movement implies that the international context for the vast majority of the countries studied is affecting the inflation versus unemployment tradeoff.

Original languageEnglish (US)
Pages (from-to)5-21
Number of pages17
JournalJournal of Central Banking Theory and Practice
Volume9
Issue number1
DOIs
StatePublished - Jan 1 2020

Keywords

  • Inflation
  • Omitted Variables
  • Phillips Curve
  • Trade-off
  • Unemployment

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Strategy and Management

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